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Income Tax

Merging Income Tax and National Insurance would just be more honest

Nov 15th, 2011
by Matthew Sinclair.
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Over the weekend Kamal Ahmed, Business Editor at the Sunday Telegraph,  reported that the Government is slowly moving towards simplifying the tax system by at least merging the administration of Income Tax and National Insurance. Our research on the growing complexity of Britain’s tax code shows that an ambitious attempt to simplify the system is needed. And in another recent paper we showed how a full merger was possible.

A full merger, and bringing the two taxes together instead of just having them work the same way behind the scenes, isn’t just simpler.  It would also be more honest. Here is a simple new video, produced with visualisation experts See What You Mean, that sets out how the tax system understates how much we’re really paying, in Income Tax and Employees’ National Insurance – even before we get onto Employers’ National Insurance which also depresses your wages:

Click here to tweet the video to your family and friends

Mixed messages from the Government on tax transparency and simplification

Nov 14th, 2011
by Jonathan Isaby.
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Campaigning for the tax system to be more transparent and simpler has always been one of the core missions of the TaxPayers’ Alliance.

And so in broad terms we very much welcome the consultation which was launched this morning by Treasury Minister David Gauke entitled Modernising the administration of the personal tax system: Tax Transparency for Individuals.

The opening line of the document states:

“The Government wants to hear views on how increased transparency and accessibility to tax information can build greater awareness and understanding of how the system works.”

Frankly, it ought to read: “Increased transparency and accessibility to tax information DOES build greater awareness and understanding of how the system works – so we are going to get on and do it.”

Frustrations about the pace at which the wheels of government turn aside (the document is now subject to a 12-week consultation, which should at least allow the Chancellor to deliver some action in the Budget next March), most of the substance and direction of it is to be welcomed.

The Government is already looking at how in some other countries there are systems in operation whereby individuals can go online to see how much they are paying in tax month-by-month and year-on-year.

At the event launching the consultation this morning, David Gauke showed prepared mock-ups of what a personal HMRC web page could look like for Britons. This would enable people easily to see how much of their income goes on income tax and national insurance contributions – including the oft-forgotten employer’s element of the NICs. This would show people year-on-year whether they were paying more or less in tax and would indeed be a welcome leap forward in transparency. As this video produced by the Treasury itself demonstrates, there is widespread public ignorance about how much tax they are actually paying:

Also today, the Government published its latest position on the integration of the operation of income tax and National Insurance Contributions, in response to a consultation it held on the issue earlier this year.

The TaxPayers’ Alliance has called for a complete merger of National Insurance and Income Tax, as explained in our recent report, Abolish National Insurance, and that is what we recommended in our response to the consultation: National Insurance is almost indistinguishable from Income Tax in its function of raising revenue and the current system obscures public understanding of tax on earnings.

It is disappointing, therefore, that the Government has not been persuaded of the merits of this case, concluding as it does that that it wishes NICs to “retain an identity distinguishable from income tax” as part of maintaining the so-called contributory principle.

It does, however, accept that “closer integration of the operation of income tax and NICS has the potential to reduce burdens on business, remove economic distortions and improve fairness” – although does not foresee being able to implement any changes until “around 2017”.

At a time when businesses are crying out for red tape to be reduced, five years does seem an extraordinarily long time to wait for any action on this.

The immorality of the 50p rate

Sep 16th, 2011
by JP Floru.
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The 50p tax rate harms the poorest in society most. It can do so in two ways: their jobs may cease to exist or never be created; and because the poor end up paying a larger share of the total tax take. It is time for the Government to stand up for what is morally just and get rid of the 50p rate.

When you increase tax on the rich, they have less money to spend. So they cut back. What do they cut back on? They may reduce spending on luxury objects: not buy that painting or that antique chest. This is likely to be a minor change – their house may be full already. Or they may reduce spending on services. Restaurants may suffer in a minor way. Minor, because the rich still have to eat and typically do not have much time to cook for themselves.

Or perhaps they cut back on domestic staff: the window cleaner, the cleaner, the cook, the gardener. Precisely those jobs for which you do not need university degrees or a long CV. In other words: the jobs for the less well-off are the most likely to be dispensed with. Sometimes full national insurance paid jobs will be replaced by cash-in-hand jobs. Full time may become part-time – now entitling the cleaner to claim housing and other benefits. This is the trickle-down effect; so often derided, but a daily reality for those who have not many opportunities at the best of times.

A large number of studies have shown that if you cut tax for the highest earners, they end up paying a higher share of the total. The opposite is true, too: when you increase their taxes, the less well-of pay a higher share. This is because paying for tax experts who can find methods to avoid taxes becomes a more lucrative alternative than to pay the increased tax. In addition high earners (and companies) will flee – either in person, or with their capital. There is a lot of evidence that this is happening in the UK right now. Those who are no high earners therefore end up paying a larger share of the total tax take.

All this is made worse by the fact that the rate was introduced as a political measure. The fact there needs to be a review on whether it raises money demonstrates that there was no work done before its introduction to prove it would raise money. We need to say this loud and clear. Taxing high earners more does not make the rich suffer much: it’s the poor who end up poorer.

Treasury ‘call for evidence’ on merging National Insurance Contributions and Income Tax

Sep 14th, 2011
by Rory Meakin.
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In his Budget 2011 speech the Chancellor signalled his intention to look into the operation of Income Tax and National Insurance Contributions. HMRC and the Treasury launched a “Call for Evidence” which expires this Monday, 19th September. The consultation includes 14 questions which have been copied below. The first three are of general interest and are aimed at everyone, and the others are more technical, aimed at HR professionals and employers.

If you want to respond so policy-makers in Government know your thoughts about the complexity and burdens of running separate systems of taxing income, please email incometaxnics.simplification@hmtreasury.gsi.gov.uk with your comments. We have reproduced the questions below and, for the general interest questions, provided brief suggestions.

General interest questions:

1. The Government believes that integrating the operation of income tax and NICs may have the potential to remove distortions, reduce burdens on business and improve fairness. Do you have any comments on these objectives?
You might want to mention transparency, and suggest that this objective, along with the others listed, could be much more effectively achieved by considering employers’ National Insurance Contributions (NICs) as well as employees’ contributions.

2. Of the differences between income tax and NICs listed in Table 1.A (or any others that you consider important) which do you see as the most significant in terms of their impact on: a economic distortions; b burdens on employers; c fairness?
Again, employers’ NICs impact upon these criteria so you may want to mention them here, too.

3. What do you think are the most important steps that could be taken to reduce the effects on: a economic distortions; b burdens on employers; c fairness?
Would some degree of tinkering with the existing, complicated system be best or should the Government be bolder and abolish NICs altogether and adjust Income Tax accordingly?

Employers and Payroll Professionals:
4. Under the current system, how much staff time and/or other resource is required to carry out income tax and NICs processes? Please give a score on a scale from 1 to 5 where 1 is only a small amount of time/resource and 5 is a great deal of time/resource for each of the following:
a) Familiarisation: understanding HMRC’s requirements, legislation and guidance.
b) Retrieval of information: obtaining the information required to run a PAYE payroll.
c) Record keeping: maintaining the records needed for income and NICs purposes e.g. keeping copies of returns/letters where necessary.
d) Calculation: calculating and checking income tax and NICs due (including in-year and end of year processes).
e) Provision of information to HMRC: reporting of information to HMRC e.g. P45s for new employees.
f) Provision of information to employees: reporting and providing information to employees e.g. year end P60s.
g) Payment of liabilities: paying income tax and NICs to HMRC.
5. Which aspects of the current income tax and NICs process work well for your business?
6. Do you carry out income tax and NICs obligations together? Are there any elements you carry out separately?
7. What effect do differences between income tax and NICs have on wider payroll processes such as expenses and benefits, statutory payments and student loans deductions?
8. Which of the differences between income tax and NICs are dealt with largely automatically by payroll software and which require significant manual working? Where manual working is required how straight forward is this?
9. Are there particular issues that occur in the calculation of income tax and NICs?
10. How often is it necessary to correct income tax or NICs calculations and which are the most time consuming to correct?
11. Do you have any comments about difficulties in designing or using software resulting from the differences identified in Table 1.A (or any others that you consider important)?
12. What do you see as the main differences between income tax and NICs in relation to employees you have who work internationally?
13. Which of the differences outlined in question 12 are dealt with largely automatically by payroll software and which require significant manual working? Where manual working is required how straightforward is this?
14 Do you have any views on how the introduction of Real Time Information (RTI) may affect the cost and benefits of income tax and NICs integration?

Sunday Times says scrap 50p tax and raise the personal allowance

Sep 13th, 2011
by Rory Meakin.
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The Sunday Times has called (£) for the 50p top rate of Income Tax to be abolished. The lead editorial means the paper joins the ever-growing consensus that the rate is a political gimmick doing lasting economic damage and has to go as part of a package of measures to help get the economy back on track:

A simple cut in the 50p rate would look politically crass. But in a package that included higher tax allowances for the lower paid, a boost to spending on infrastructure and a bonfire of red tape, it would be effective and right. Nobody benefits from a tax that brings in no money and everyone suffers from the results of an uncompetitive economy.


The Sunday Times is right to acknowledge that it is unrealistic to expect the 50p rate to be abolished as a lone budgetary measure. Few would argue that when the Government do finally scrap the rate they should not also take other action to reduce the tax burden for those who do not earn over £150,000 per year.

The link to raising the personal allowance is an attractive proposition. In an interview with the New Statesman, Liberal Democrat Chief Secretary to the Treasury Danny Alexander said the ‘priority’ for tax cuts should be people on low and middle incomes. He said we should be:

trying to get to a situation where people in a full-time job on the minimum wage are paying no income tax at all.

Mr Alexander is right. The minimum wage is a flawed policy, but if it is there to indicate the bare minimum level of income someone needs to live off, it can’t be acceptable for the Government to take money from people earning below that amount. The implication from the Chief Secretary’s wording implies that he thinks the allowance should be raised to about £12,500, higher than the Coalition’s stated aim of £10,000 and the current level of £7,475.

The two proposals should be combined and announced in the Chancellor’s Autumn Statement. Removing the poorest from taxation altogether will go a long way to improve the lives of people who are currently in a welfare trap, boost economic activity and reduce welfare bills by restoring the incentives to work. Meanwhile, abolishing the 50p rate will help retain and attract the entrepreneurs, companies and investment which will create prosperity and jobs the economy desperately needs to haul itself out of its current stagnation.

Rapidly raising the personal allowance will be expensive and Britain’s huge budget deficit means it must be matched pound-for-pound by spending cuts to remain credible: there is simply no room for manoeuvre on this. Britain’s rapidly rising contributions to the EU, foreign aid and ‘ringfenced’ healthcare spending are all areas the Government should look at in order to reform the tax system. We can’t afford not to.

Top economists urge Chancellor to scrap 50p tax in Financial Times letter

Sep 7th, 2011
by Rory Meakin.
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Twenty top economists have written to the Financial Times urging the Government to scrap the 50p rate of income tax to boost economic growth. The letter adds weight to the growing consensus that the 50p rate is economically damaging and that it will fail to raise much for the Treasury, with some estimating the policy actually loses them tax revenue.

We are concerned that Britain’s 50p income tax is doing lasting damage to the UK economy. It gives the UK one of the highest personal tax regimes in the industrialised world, making it less competitive internationally and making us less attractive as a destination for both foreign investment and talented workers.


Since 1997, Britain’s place in the World Economic Forum’s low tax ranking has fallen from 4th to 95th as our competitors have reduced their tax burdens while we have increased ours. Britain urgently needs a radically simpler tax system with lower rates. But getting rid of a tax that probably doesn’t even raise any money for the Treasury has to be a policy priority for a Government that claims to be serious about growth.

We call on the government to drop the 50p tax at the earliest opportunity as part of a package of measures to stimulate growth. Only by returning to an internationally competitive tax regime will Britain enjoy long-term sustainable economic growth.

The authors of the letter, who come from a range of viewpoints on the spectrum of political-economic thought, are correct. The Government must not waste any more of Britain’s economic prospects on this economically damaging political gimmick. It’s time for the Government to get off the fence and explain with conviction why this tax is a bad idea. It’s time to scrap the 50p rate.

The 50p rate of income tax is unfair. Scrap it

Aug 26th, 2011
by Rory Meakin.
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Fairness is a concept most people rely on when thinking about how to set tax rates and who should pay what. Unfortunately, the quality of information about tax facts in the media is so poor that public understanding is frequently skewed and, as a result, people often argue for changes that contradict their principles.

Last week on Any Questions following a question about Warren Buffett’s call for the rich in the US to pay more tax, the discussion turned to the 50p rate in Britain. Katharine Birbalsingh, the teacher who famously spoke at the Conservative conference last year, made a point about fairness on the 50p rate most would agree with:

The system ought to be fair, it’s not fair if someone earning £40,000 is paying the same rate of tax as someone who’s earning £200,000. It just doesn’t sound right to me. Now, I take the point about wanting to attract people internationally and so on, but then perhaps we need to lower the rate for the ones in the middle and then it doesn’t need to be as high as 50 per cent for the top ones. But it just isn’t right that someone earning £40,000 and £200,000 should pay the same amount of tax. And absolutely I agree with Tim about the loopholes and so on. Clearly the people at the top aren’t paying very much at all and that’s a massive problem but the middle classes, the ordinary policemen and teachers and nurses are the people who pay the bulk of tax in this country and that just isn’t fair.

The first crucial point about people earning £200,000 and others earning £40,000 is that, if you abolished the 50p rate, they would still not pay either the same amount of tax or the same rate. Someone with a £40,000 salary would pay £6,505 in income tax, which equates to 16.3 per cent of that salary. Someone with a £200,000 salary would pay £73,000 income tax, which equates to 36.5 per cent of the salary. Even the marginal rates, the percentage you pay for each additional pound earned, are different: 20 and 40 per cent, respectively. As we go higher up the income scale, this relationship still holds.

Someone earning £45,000 would enter the 40 per cent income tax rate. If the 50p rate were abolished, they would pay the same marginal rate as someone earning £200,000. But they would still pay a much smaller amount representing a much lower rate. The individual on £45,000 would pay £8,010, or 17.8 per cent, compared to £73,000 (36.5 per cent) for the individual on £200,000.

Independent estimates suggest the 50p rate doesn’t raise any money for the Treasury at all, and I’ve discussed the unfairness of hitting people with a tax for no better reason than to make them suffer for the politics.co.uk website. I don’t think most people would think it unfair that someone earning £200,000 paid £73,000 (50p rate abolished) instead of £78,000 (with 50p rate) in income tax when the individual on £45,000 pays £8,010. But most of us do think it’s very unfair to clobber people with taxes that don’t even raise any money.

Forget 20p, CPS report says, tax on income at basic rate is over 40p

Aug 19th, 2011
by Rory Meakin.
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The Centre for Policy Studies (CPS) have published a factsheet today on how much tax you really pay on your income. Ryan Bourne smashes the myth that tax rates in Britain are just 20, 40 and 50 per cent by combining the various taxes on income into a single “marginal effective tax rate”.

Income Tax, employees National Insurance and employers National Insurance are all combined and adjusted to calculate how much marginal tax people really pay at various levels. The results are a lot higher than most of the comment in the media would lead you to believe.

The real basic rate is 40.2p, not 20p. The real higher rate is 49.0p, not 40p. And the real additional rate is 57.8p, not 50p. But it gets worse than that. Those earning between £100,000 and £114,950 face a rate of 66.6 per cent because in this range £1 of the personal allowance of tax free income is withdrawn for every £2 earned at the same time as having to pay Income Tax and both National Insurance rates.

Worst of all, the greatest loss of income (including both taxes and welfare withdrawal) to the Treasury will fall on some low earners at 79.1 per cent, and that’s even after the Universal Credit has been introduced. Until then, the rate is an incredible 96 per cent. The Director of the CPS, Tim Knox, said:

This factsheet shows up some of the inadequacies and inconsistencies of the UK’s personal taxation system. But the most important aspect it highlights is the need for transparency. We should stop talking about a 20, 40 or 50 per cent tax band and accept that the real marginal rates are much higher.

It’s time for the tax system to be radically overhauled to make it simple, transparent and honest. Britain’s tax system now is none of those things: impossibly complicated, disgracefully opaque and public debate that borders on downright dishonest. It needs fundamental change.

The TaxPayers’ Alliance and Institute of Directors major joint project, the 2020 Tax Commission has been undertaking just this task since January and will publish a comprehensive review in Spring next year. In the meantime, we should at the very least insist politicians and media commentators acknowledge that tax at the basic rate is over 40 per cent, not 20.

HMRC: Getting tax wrong since 2005… and earlier

Aug 1st, 2011
by Emma Boon.
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There was further embarrassment for the taxman this weekend after the Commons Treasury Committee criticised HM Revenue & Customs (HMRC) for poor performance and ‘endemic delays’.

HMRC was formed in 2005 when Inland Revenue and Her Majesty’s Customs and Excise were merged. Like the two organisations that were combined to form it, HMRC hasn’t always gotten things right and caused problems for millions of taxpayers in the process. This latest report by MPs was ordered after last year’s PAYE debacle when HMRC had to admit that 6 million people had been paying the wrong income tax in previous years.

Almost 1.5 million people had to pay back an average of £1,500 each, after being told they had been underpaying because of faulty calculations. At the time we were very critical of the tax office, and said that things had to improve. This newest report reveals that the department is in crisis and confirms they still aren’t getting it right – and taxpayers are the ones left to pick up the pieces.

Let’s not forget that isn’t even their biggest mistake, as John O’Connell blogged in February this year when the Public Accounts Committee criticised HMRC for their mismanagement of the tax system and a few years before that the tax office lost 25 million taxpayers’ details that had been copied onto a disc – whoops!

Key complaints raised in this latest report were:

  • The continuing legacy of unresolved tax discrepancies from past years still affecting millions of tax payers
  • Taxpayers had to wait as long as three months just to receive a reply to a letter
  • Excessive reliance on the internet for filing tax returns, or giving information, to the disadvantage of those without good internet connections, such as the elderly
  • “Overly ambitious” IT projects such as plans to make employers submit “real-time” data for the PAYE system
  • Increasingly complex tax laws.
  • Just 48 per cent of telephone calls made to HMRC offices are answered
  • The use of 0845 phone numbers by HMRC for customer queries. The committee suggested that cheaper 0345 numbers are used.

We can't go on like this, with a tax system in total disarray

We cannot go on with the system in total disarray like this, it’s failing millions of taxpayers and we’ve put up with too many mistakes and excuses for too long. Last time it was a new IT system that was blamed, now it is staff shortages. Enough is enough.

At least after this most recent debacle Mike Clasper, chairman of HM Revenue & Customs, came out and apologised. Last year it took Dave Hartnett a full day to put his hands up and say sorry, after initially telling the BBC that he “had nothing to apologise for”. The attitude may have changed, but the problems still remain. It is too hard to make contact with HMRC, and it is often too difficult to understand the information and guidance.

The problem of increasingly complex tax laws, highlighted by the committee, is one that we have been shouting about since our inception. The 2020 Tax Commission (a joint project with the Institute of Directors) will release a report early next year that will look at ways to address this and other problems with our tax system. We released a video featuring the world’s fastest speaker to underline how long the UK tax code now is.

The taxman must get his house in order, taxpayers should not have to tolerate another fiasco.

National Insurance holiday scheme still a flop, says Balls. Time to cut it, Osborne

Aug 1st, 2011
by Rory Meakin.
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The Government’s National Insurance holiday scheme is a “total flop”, according to Shadow Chancellor of the Exchequer Ed Balls. The scheme, which exempts small firms (those with 10 or fewer staff) from having to pay National Insurance for a 12 month period, has attracted just 5,000 registrations out of a total of 400,000 expected to benefit from the scheme.

“George Osborne hailed this flagship policy last year saying it could create 800,000 private sector jobs. But it’s turned out to be a total flop with just 1 per cent of the 400,000 businesses George Osborne said would benefit taking advantage”.

This should come as no surprise. The scheme only applies for 12 months and doesn’t apply in the areas most likely to generate new business; London, the South East and Eastern regions of England. As I wrote back in February, the Chancellor should learn from the mistakes of his predecessors and abandon the doomed-to-failure micro-managing from his Whitehall citadel.

Scheme "a total flop" says Balls

Back in February, the Treasury said it was “too early to tell” if the scheme was working. Now they say they are taking steps to “improve” the scheme and encourage more participation. It’s not too early to tell, now. The scheme has failed. But as the Treasury are in the mood for taking steps to improve the scheme, here’s a suggestion: reverse the rise you implemented in April.

National Insurance is among the worst forms of taxation in the current tax code. Outmoded, complex and arcane, National Insurance is a tax on jobs that mimics and duplicates Income Tax but manages to be even more damaging. Instead of fiddling about with pointless schemes such as this payment holiday, George Osborne should cut the rate for all businesses. Better still, he should abolish it altogether.

The 50p rate is an unaffordable gimmick. Abolish it

Jul 20th, 2011
by Rory Meakin.
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Jeremy Warner has added his voice to the campaign to abolish the 50p top rate of income tax. In a thoughtful article in yesterday’s Daily Telegraph, Mr Warner reaffirmed the growing consensus that far from raising any revenue for the Treasury, the 50p rate raises so little, if indeed it raises anything, that abolition would be unlikely to harm revenues.

“There isn’t much the UK can do about the stupidities of European policymakers, yet there are still things that can and indeed must be done to help ourselves. Targeted tax cuts are proven to incentivise enterprise, investment and growth, and there are at least two that could be enacted immediately in a manner unlikely to harm revenues.

“One would be to reverse the 50pc higher tax rate. A second would be to reintroduce 10pc taper relief for capital gains. It is logically absurd to have a tax system which is less favourable to top earners and business investment now when such tax breaks are really needed than it was during the boom, when arguably they weren’t. The motivation for imposing these higher rates was entirely political, and both are now almost certainly costing more money than they raise.”

Adele opposes the 50p rate

Hippocrates may not have actually said “first, do no harm” in his famous oath for doctors, but there’s certainly a good case for requiring Chancellors of the Exchequer to swear something along those lines before they can be allowed to get their hands on the keys to Number 11. But while this principle should apply whatever the economic circumstances, it is especially relevant now. The British economy is in the doldrums, weakened by taxes that are too high and too complex and asphyxiated by over-zealous regulation and red tape. The national finances are in a perilous state, with only the wafer-thin credibility of the Coalition Government’s austerity plan saving them from the fate of Ireland, Greece and Italy. We simply can’t afford expensive political gimmicks.

Jeremy Warner made the point that the inevitable puerile spin from abolishing the 50p top rate of tax must not deflect the Government from doing the right thing:

“In today’s febrile and hopelessly compromised political environment, it would require real courage to carry out a programme that would inevitably be dubbed tax breaks for the rich, yet without radical incentives for wealth and job creation, it’s hard to be optimistic for the future of our economy.”

Now must be the time to meet the political challenge for the national economic interest. The Government must no longer defend the indefensible: a tax that cannot even fulfil its primary objective of raising revenue. Abolish the 50p rate of income tax, Mr Osborne.

Even if businesses and entrepreneurs don’t move abroad, they may simply do less

Jul 19th, 2011
by John O'Connell.
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Yesterday’s City AM reported that over a quarter of large businesses are considering moving abroad, with most citing Britain’s high and complex taxes as the biggest reason. It would be disastrous if any of these companies follow through on that. Jobs would disappear and growth would be affected. The tax system – and especially punitive, political measures like the 50p rate – could drive individuals overseas too.

But that’s not the full story. Those that do decide to stay here may simply choose to do less. Uncertainty might force businesses to make more cautious decisions, when they may have otherwise taken decisions that created jobs in a more stable tax system.

All this is explained very well by Gregory Mankiw, a professor of economics at Harvard. In this article for the New York Times he gives a very simple and clear explanation why higher taxes will mean he might work less. The people who miss out are those that would have otherwise enjoyed or used the goods and services he would have produced.

When we talk about businesses or entrepreneurs moving abroad because of taxes, some say that these are non-stories, as it doesn’t really happen. City AM’s piece show that’s a real threat though. And what’s certainly true though is that even if they do stay, their decisions are distorted by the tax system. They may simply do less.

Cut Corporation Tax to 18% to restore competitiveness, says CBI

Apr 19th, 2011
by Rory Meakin.
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The Confederation of British Industry (CBI) has said British competitiveness has slumped between 2000 and 2010.

The big businesses club has said Corporation Tax should be slashed to 18 per cent to help stop Britain’s slide as upmarket chocolate mint maker Bendrick’s announced its Hampshire factory will close and production transferred to Germany (effective Corporation Tax rate 23.8 per cent compared to the UK’s 27.9). The CBI also criticised the 50p top rate of Income Tax as a barrier to inward investment and growth:

“The 50p tax rate on earnings over £150,000 is seen as a critical blocker on both attracting internationally mobile staff to the UK, and keeping top UK talent here.”

Business Secretary Vince Cable responded to the report talking up the British investment climate, despite the fact Britain’s effective rate is one of the highest out of 83 selected countries according to a Cato Institute report:

“The UK inward investment regime is amongst the most welcoming in the world”

Could go faster...

Britain’s tax code is too long, the rates are too high, the detail is too complicated and the result is a faltering economic recovery. The Chancellor ought to have cut Corporation Tax harder, perhaps to the CBI’s figure of 18 per cent and should be tackling the complexity which people actually have to deal with in their tax affairs and which makes compliance expensive rather than boast about how the budget’s tax simplification measures the Government will follow through won’t actually make much difference to anyone because they’re redundant anyway.

We need a stronger, resilient economic recovery urgently and that means a simpler tax system with lower rates. Although the Government could and should cut it further and faster, a Corporation Tax cut to 18 per cent would be an excellent way to start.

National Insurance is archaic, confusing and opaque. Abolish it

Mar 21st, 2011
by Rory Meakin.
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George Osborne has a ‘secret plan‘ to merge National Insurance (NI) into Income Tax according to Thursday’s Independent, a story followed up in the weekend papers. National Insurance, which raises approximately £100 billion annually will be abolished while Income Tax, which raises about £150 billion, will be raised to compensate for the loss of tax revenues. The Office of Tax Simplification’s survey of businesses found almost unanimous support for the idea, which would save both business and HMRC money in administration costs. An unnamed minister told the newspaper:

“The changes to benefits could tip the balance in favour of merging tax and national insurance. It would be a radical reform and lasting legacy for the Government. We don’t want to be remembered for cuts, cuts and more cuts.”

The changes in question are the replacement of various benefits with a ‘Universal Credit’ and the introduction of a single flat rate state pension, both of which will break the link between NI contributions and benefit payments obliterating the bulk of the already scrawny last vestiges of its insurance function and making it what it effectively already is: a second income tax with different rates, different thresholds and different applicability and, in case all that isn’t already needlessly opaque and complicated enough, it’s split into separate payments for employers and employees, too.

Satisfyingly transparent

Combining Employee’s NI (scheduled to rise from 11 to 12 per cent in April) with the basic rate of Income Tax (currently 20 per cent) would be a great step forward for transparency and simplification leaving us with a new Income Tax rate of 31 or 32 per cent, a number much closer to the truth. But to be truly radical, the so-called Employer’s NI ought to be abolished, too. To make up for the lost tax revenues from someone earning a regular salary of £30,000, assuming salary levels rise to the extent Employer’s NI is no longer collected,  Income Tax would need to be set at just over 39 per cent. This percentage is produced by dividing the total tax amount by the true income (£33,108, a combination of both the salary and the employer’s NI contribution) less the Personal Allowance (all rates and thresholds 2009-10).

Salary: £30,000

Employer’s NI: £3,108
Employee’s NI: £2,671
Income Tax: £4,705

Total Tax: £10,484

The above calculations are very rough and do not account for employers’ or employees’ pension contributions, which would increase the rate required for the Treasury to take the same money. They also don’t account for the fact that there are a plethora of different rates for the self-employed, married women and others, as you can see on this HMRC table. These lower the required percentage, as would applying the new rate to income from savings and dividends, which are both currently administered separately. But it does show how the rate would be less than a simple combination of the three existing rates for a typical basic rate employee (20, 12.8 and 12.8 per cent).

Also at the Independent, Sean O’Grady produced an interesting graph of the effective marginal tax rates from a combination of Income Tax, employee’s NI and tax credits showing the bizarre complexity and irrationality of the system. A merger would significantly simplify the system we all face but would be a brave move for the Chancellor that would draw attention to how much tax we really do pay. It’s perfectly possible to work out what our employers pay in their employer’s NI contributions and then add this to the separate Income Tax and employee’s National Insurance figures to find out how much tax we pay. But how many of us do? Reform would mean the calculation would be done for us, showing on each payslip our true pre-tax income rather than maintaining the pretence that employer’s NI is somehow a mysterious other only to be known by the payroll department and HMRC.

The Chancellor should rise to the challenge and lay bare to each one of us how much we earn and, in one single number on our payslips, how much direct tax we pay. Listen to the IFS and your own Office for Tax Simplification and businesses up and down the country. Abolish National Insurance, Mr Osborne.

Left Foot Forward continue to be confused on the 50p rate

Feb 24th, 2011
by Matthew Sinclair.
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Left Foot Forward have posted a reply from Duncan Weldon to Fraser Nelson and I poking holes in his argument that strong income tax receipts in January show the 50p rate has effectively raised revenue.  He makes two arguments.  First, he says that there is a longer term pattern of tax receipts rising faster than earnings and employment since the 50p rate was introduced:

“income tax receipts have increased in advance of earnings or employment growth each month since April 2010 (when the 50p rate was introduced)”

That in no way shows that the 50p rate is raising money, in fact it is perfectly compatible with the scheme being desperately ineffective.  Let’s take a hypothetical example to show why: a simple economy where the only high earners are two hedge fund managers making a million pounds a year.  The 50p rate is introduced and one of them relocates to Switzerland, the other stays in London.  Tax receipts will be lower because the hedge fund manager has left, but so will employment (down one) and earnings (down one million).  But taxes will rise relative to employment and earnings, as the hedge fund manager who stays is paying a higher rate on his income.

In our case employment and earnings are still going up, we’re recovering from a recession after all.  But the public finance figures released earlier this week can’t tell us whether or not revenue is higher or lower than it would have been without the 50p rate.  People have left the UK to avoid 50p tax (reducing employment and earnings), others will take different steps to reduce their taxable income, and it will take proper study to ascertain whether or not enough of them left to offset those who remain paying 10 per cent more on their earnings above £150,000.  Duncan Weldon has literally nothing to add to the debate over whether or not that is happening.

Even if his metric were relevant, which it really isn’t, a jump in revenue in January wouldn’t be particularly telling because a significant amount of that would be self-employment returns for 2009-10.  He retorts that we don’t understand self-assessment because there are payments on account for 2010-11 due in January 2011.  There are, but – as the HMRC reports in the page he links from his blog, and anyone who has filled out a self-assessment return knows – there are also balancing payments for 2009-10 due in January 2011.  And in an economic recovery those balancing payments are likely to be a significant amount.

The best estimates we have right now of the 50p rate’s effects are studies from the Institute for Fiscal Studies, the CEBR and one the TPA produced by modifying the Treasury’s calculations to a more realistic Taxable Income Elasticity assumption (reported in this book).  All those estimates suggested that the measure could well lose money.  That would mean ordinary families would, as well as putting up with the economic pain, have to pay more, or see greater cuts in spending, in order to pay for higher tax rates on the rich.

Strong revenue in January doesn’t mean the 50p rate is working

Feb 23rd, 2011
by Matthew Sinclair.
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Duncan Weldon is over the moon claiming that all the “scaremongering” that the 50p rate could well lose money, which has come not just from the TPA but also the Institute for Fiscal Studies and consultancy the Centre for Economics and Business Research, should be rejected because we saw strong income tax returns in January.

Debt interest as a share of national income projections, Bank for International Settlements

Yesterday’s figures were a pleasant surprise, but we aren’t anywhere near being out of the woods yet.  Just yesterday there were fresh warnings about our long term fiscal position.  The Press Association reported a new study by analysts Maplecroft.  Our “high public spending on health and pensions, massive borrowing and shrinking working population” were cited as we were rated as having the tenth worst long term fiscal pressure.  That warning follows a Bank of International Settlements report last year which also suggested a grim long term picture.

January revenue figures don’t mean the 50p rate has been effective either.  The 50p rate will affect two groups of workers:

  1. Employed.  Given that the rate came in from April 2010 why would resulting revenue suddenly start showing up in the public sector accounts in January 2011?
  2. Self-employed.  Self-employed workers did pay tax in January, but on their 2009-10 income, before the rate came in.  As Fraser Nelson points out on the Spectator Coffee House blog, many high earners may have brought forward income so that they paid at the 40 per cent rate levied in 2009-10 instead of the 50 per cent rate in 2010-11.  In other words, high revenues last month may well be evidence that the 50p rate does have an effect on incentives, not that it doesn’t.

The evidence that the 50p rate will lose money was summarised in our book How to Cut Spending.  In it we ran the numbers showing how even the Treasury’s own sums suggest it will lead to lower revenue if you adjust the “Taxable Income Elasticity” to a more reasonable figure in line with that found in HMRC studies.

Duncan Weldon is either ignorant of the facts or trying to create a useful myth.  The reality is that all of the best estimates available suggest that ordinary people are going to have to pay more, or face greater spending cuts, for the luxury of spiting the rich.  That makes the policy indefensible.

Barclays boss confirms London’s 50p tax fears

Feb 16th, 2011
by Rory Meakin.
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Barclays boss Marcus Aigus has warned that his firm is finding it more difficult to keep senior staff in London due to the UK’s 50p top rate of income tax. This news adds to growing fears that at 50 per cent income tax is at or beyond the vertex of the Laffer curve. In other words, the tax either raises no money for the Treasury or actually causes it to collect less money than it would have done without the 50p rate. The reason for this is simple: 50 per cent of nothing is a lot less than 40 per cent of the income those senior staff would have earned if they’d have stayed in London. And then there’s the VAT, duties and other taxes the Treasury won’t collect. TaxPayers’ Alliance Research Fellow Mike Denham explains it all in more detail here.

Beyond the vertex

The loss of revenue to the Treasury has been estimated at £800m by economist David McWilliams of the Centre for Economics and Business Research. Stuart Adam of the IFS produced a graph indicating that total revenue, including indirect taxes, will fall by a similar amount. However, research by HMRC uncovered by TaxPayers’ Alliance director Matthew Sinclair in ‘How to cut public spending (and still win an election)’ shows the real loss may be even greater. TaxPayers’ Alliance calculations put the figure at up to £4.5bn. And none of this measures the cost to the economy of the distortions involved, beyond the loss of revenue to the Treasury.

The 50p top rate of tax is just one policy among thousands that make Britain’s tax system one of the world’s most complex and burdensome. To explain it all in their handbooks it takes Tolley’s Tax Guides an incredible 11,520 pages, more than double the number in 1997. To read all that out just once would take the world’s fastest reader five straight days without any breaks or sleep! Reforming and simplifying the system must be an urgent priority for the government to get Britain’s economy back on track. Unwinding all that incredible complexity will obviously take a lot of careful work, a mountainous task the 2020 Tax Commission has begun to scale and will be continuing over the coming year.

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